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What Could You Do With an Extra $458 Billion a Year?

For
years, Democrats have been critical of dynamic scoring, where estimates of the
effect of a bill on the government’s bottom line include not just changes to
taxes or spending in the bill itself, but also impacts from an allegedly
faster-growing economy that would result from the policy changes. Republicans
say dynamic scoring of “pro-growth” policies like certain tax cuts show
controlling the budget needn’t be a painful either-or choice.

In that
sense, dynamic scoring may be similar to another oft-touted way to cut the
deficit: improving enforcement of the U.S. tax code. A new IRS report shows the
annual tax gap—the difference between taxes owed and taxes paid on time—stood
at $458 billion in the 2008-2010 time frame, with a compliance rate for individuals
and companies of about 82 percent.

“This
is money that could be put to good use shoring up critical programs such as
Medicare,” said Ron Wyden of Oregon, the Senate Finance Committee’s ranking
Democrat. “It’s time the IRS put an effective tracking and auditing system in
place to locate this lost money.”

Ron Wyden (Photographer:
Victor J. Blue/Bloomberg)

But how
big a difference could an extra $458 billion a year make in the federal budget?
A good deal. In 2015, the government spent $3.688 trillion while only taking in
$3.249 trillion, for a deficit of $438.9 billion—smaller than the 2008-2010
annual tax gap.

Wyden
urged an IRS crackdown on corporations, which the agency estimates to be
responsible for about $44 billion of the annual gap. That alone would almost
cover the $49 billion the government spent on international affairs in fiscal
2015.

Most
government spending is on so-called mandatory programs—such as Social Security,
Medicare and Medicaid—and the discretionary appropriations that lawmakers spend
most of their time debating are much smaller. Under the budget deal reached
late last year with the White House, regular fiscal 2017
appropriations—excluding emergencies and funds for overseas military
operations—will total $1.07 trillion. The portion known to budget geeks as
NDD—nondefense discretionary—totals $519 billion, just slightly larger than the
tax gap.

Notably,
the IRS report said about 27 percent—or $125 billion—of the tax gap came
from people underreporting their business income. That's about $35 billion more
than the government spent on transportation in 2015.

Former
Senate Budget Committee Chairman Kent Conrad (D-N.D.) used to say that closing
the tax gap should be the first step toward narrowing the budget deficit before
resorting to tax increases.

Kent Conrad (Photographer:
Chris Kleponis/ Bloomberg)

But any
effort to recapture lost tax gap revenue would require big spending increases
on IRS enforcement—a politically unlikely outcome for an agency facing
hostility from Republican lawmakers and struggling to cope with years of tight
budgets. And even Democrat Wyden, in his statement, did not mention going after
underreported income.

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